The Housing Bubble

Some housing bubble news from Wall Street and Washington. The Monitor, “Obra Homes is the latest victim of a dismal home building market. The Rio Grande Valley-founded home builder has shut its doors locally and sold its remaining properties to a partner. At its peak in 2005, the company was the largest Valley-based home builder, putting up more than 500 homes here that year.”

“In 2006 it ranked as the 70th largest home builder in the United States, with $135 million in revenue, according to Builder Online. During 2005 and 2006, more than 6,800 homes were being built in Hidalgo County each year. New home permits have dropped by more than a third since then.”

“Los Angeles-based KB Home, one of the nation’s largest home builders, pulled out of the Valley in 2007. Metrostudy estimates there are more than 3,000 unoccupied, new homes in Hidalgo, Cameron, Willacy and Starr counties.”

“‘They’ve all cut back,’ said William Brueggeman, director of the real estate department at Southern Methodist University in Dallas, of lenders. ‘Their volumes are below half of what they were in the boom years.’”

The Rocky Mountain News. “Mike Rinner, an economist with the Genesis Group that has tracked Denver real estate for nearly 20 years, gives the metro-area housing market a D-minus.”

“‘There is no sugarcoating it,’ said Rinner. ‘The only reason it doesn’t get an ‘F’ is that we feel it will rebound pretty nicely after this. Before, we thought it would just decline to these low levels and just go splat.’”

“Larry Stark, principal of National Valuation Consultants, also said the U.S. market is in much worse shape than Denver.”

“‘We work all over North America. . . . And until you have been to some of these places, you don’t really know how bleak they are,’ Stark said. ‘We have an office in Florida, and it is going to be three years before it even starts to see a turnaround, and in the real estate industry, three years is an eternity.’”

Dow Jones Newswires. “Highlighthing their desperation to sell houses, builders are bringing back the gimmicks - mortgage rates that start low, help with down payments, zero out-of-pocket expenses - that helped fuel the housing bubble before its spectacular bust.”

“But this time, they say, history won’t repeat itself.”

“Builders acknowledge things are tough, but they promise they’re being responsible. ‘What’s going on right now is not what got us into this, it’s what’s going to get us out,’ said Dan Klinger, president of K. Hovnanian American Mortgage. ‘We overdocument. The loans have never been cleaner.’”

“That isn’t enough for some, who say the specials sound too much like the free- lending heyday.”

“‘It’s a different shade of gray, but essentially it puts people in the same position,’ said Jeffrey Guarino, managing director of Gotham Capital Mortgage in New York. ‘If we haven’t learned anything about the value of equity in the risk of a foreclosure, then what have we learned?’”

From CNN Money. “As part of the Economic Stimulus Act, Congress tried to get funds for jumbo loans flowing again by temporarily raising the dollar limits for mortgages that Fannie Mae and Freddie Mac can buy.”

“Despite the increased caps, these new ‘conforming jumbo loans’ - for anything between $417,000 and $729,750 - are still more expensive than the conforming loans below $417,000.”

“‘[The raised caps] produced less activity than I thought they would,’ said Rep. Barney Frank, in opening remarks at the hearing. ‘Beneficial effects have be slow to materialize,’ added Spencer Baccus, ranking republican member from Alabama.”

“The problem: The investors who buy mortgages on the secondary market still consider these new conforming jumbo loans riskier than the original conforming loans, and put a higher risk premium on them.”

“They’re only available in about 70 metro areas - many of the most challenging markets in the nation. ‘Look at the markets where these are offered,’ said Keith Gumbinger, of HSH Associated, a publisher of mortgage market information. ‘It’s where home prices are falling.’”

From Reuters. “As U.S. banks mop up the mess from billions of dollars of bad home loans, buyers are finding the days of cheap money are over and, in many cases, tougher versions of old lending rules now apply.”

“‘The clock is rolled back about 20 years,’ said Lou Barnes, publisher of Mortgage Credit News.”

“Craig Van Skaik, a Beverly Hills, California, mortgage broker, who has a stable of wealthy clients, said he has been pinched as new rules prevent him from borrowing on the equity he has built up in the $6.2 million house he renovated.”

“The debt on the house totals about $3.5 million. He has ample assets and income, but he needs an out-of-fashion stated-income loan.”

“‘I can’t get one dime out. I don’t like feeling like I’m trapped and I can’t tap equity,’ said Van Skaik, who has listed the home and says that because of all the new hurdles, the best buyer is someone who can come in with an all-cash bid.”

“‘I’ve done this for 22 years. I’ve never seen anything like what we’re experiencing now,’ he said.”

“Delinquencies in U.S. subprime debt and higher-quality mortgages known as Alt-A securities are continuing to increase, Standard & Poor’s said on Thursday.”

“Delinquencies for Alt-A mortgages rated between 2005 and 2007 are climbing, with total delinquencies rising as high as 17 percent in some cases, more than 6 percentage points higher than previous estimates, the ratings agency said in a report.”

“‘The 2007 issuance year continues to be the worst-performing vintage in terms of cumulative losses,’ S&P said, regarding subprime mortgages. ‘Serious delinquencies’ of payments 90 days late or more and foreclosures also are rising, S&P said.”

The Orange County Business Journal. “Newport Beach-based bond manager Pacific Investment Management Co. has bought $2.5 billion worth of subprime mortgage bonds from Israel’s Bank Hapoalim Ltd.”

“In the quarter, Hapoalim lost $870 million before taxes related to the bonds it sold. In April, the bank said it lost another $209 million stemming from mortgage defaults.”

From Bloomberg. “Residential Capital LLC, the distressed mortgage-finance company, won support from most bondholders for a debt restructuring plan needed to stave off bankruptcy.”

“Investors tendered about $9.5 billion of notes as part of an offer to exchange or buy back $14 billion of debt for as little as 80 cents on the dollar, GMAC LLC, ResCap’s parent company said.”

“Some bondholders had initially sought to build opposition to the plan, which offered investors as little as 80 cents on the dollar for their bonds, though no organized protest emerged. The bankruptcy threat left bondholders with little choice but to tender, according to a report last week by high-yield research firm KDP Investment Advisors.”

“Credit-default swaps tied to ResCap’s bonds have been trading at levels that suggest…a 97 percent chance of default within five years, based on an assumption that bondholders would recover 40 percent of their investments, according to a JPMorgan Chase & Co. valuation model.”

“Cerberus Capital Management LP’s $7.4 billion purchase of General Motors Corp.’s finance arm in 2006 also won control of a mortgage unit supplying a steady stream of cash to finance the auto lender. Then the home-loan money disappeared in a flood of subprime losses.”

“Now the GMAC LLC unit, Residential Capital LLC, is fighting to avoid bankruptcy. ResCap has been forced to stop making loans to borrowers with poor credit histories after losses of $5.3 billion during the past six quarters.”

“Cerberus founder Stephen Feinberg now has to decide whether to inject more money into ResCap or let it die.”

“‘At the time the deal was done, ResCap was the good part,’ said Tom Flaherty, a money manager at Aberdeen Asset Management Plc, which oversees more than $30 billion. His team owned ResCap bonds and sold them before they were cut to below investment grade. ‘They’re in an unexpected mess.’”

“Citigroup Inc. created a $2.5 billion mortgage-backed security called Bonifacius Ltd. in August as capital markets seized up and panic swept Wall Street.”

“The bonds were created from subprime home loans as demand evaporated. Within six months, Bonifacius collapsed as homeowners fell behind on their payments in record numbers.”

“Citigroup, Merrill Lynch & Co., UBS AG and other banks created more than $1.5 trillion of collateralized debt obligations like Bonifacius, keeping an undisclosed amount in off-balance-sheet funds called variable interest entities.”

“Bonifacius and $190 billion of similar securities have gone bust since October, spotlighting loopholes the Financial Accounting Standards Board failed to close when Enron Corp. went bankrupt in 2001 after disclosing investments that weren’t on its books.”

“‘They never got the real problem fixed after Enron,’ said Lynn Turner, the chief accountant for the Securities and Exchange Commission when the Enron scandal was exposed. ‘When people find out how little FASB did, they’re going to be shocked. FASB needs to be taken out behind the woodshed and given a good whoopin’.'”

“Variable interest entities, or VIEs, are a post-Enron version of special-purpose vehicles, the term for the investments Citigroup created that led to the demise of the energy-trading company.”

“The lack of disclosure about VIEs is adding to concern among investors after financial institutions reported $382.6 billion of writedowns and losses from subprime-contaminated debt since the start of 2007.”

“Paul Volcker, who was chairman of the Federal Reserve from 1979 to 1987, said in testimony to the Joint Economic Committee of Congress…that regulators should have stopped banks.”

“‘Why were they permitted to set up those off-balance- sheet entities that may or may not have had some formal relationship with the banks?’ he said.”

“Bonifacius is divided into nine pieces. The largest, which was originally rated AAA, has since been cut to Baa3 at Moody’s and to BBB- by S&P, the lowest levels of investment grade.”

“Banks are betting that markets will improve enough to allow the securities to be sold at a higher price, according to Stanley Sporkin, a former federal judge who helped write the federal 1977 Foreign Corrupt Practices Act when he was the head of the enforcement division at the SEC.”

“‘Not every off-balance-sheet activity is wrong,’ Sporkin said. ‘But there could be pockets of activity to hide things that later explode.’”

The Daily Breeze. “Rep. Laura Richardson lost her Sacramento home in a foreclosure auction two weeks ago, and left behind nearly $9,000 in unpaid property taxes.”

“Richardson appears to have made only a few payments on the house, which she bought in January 2007 for $535,000. After buying the home, Richardson hardly had time to live in it. Three months later, Rep. Juanita Millender-McDonald died and Richardson - then a freshman member of the state Assembly - launched a campaign to replace her in Congress.”

“Richardson won the election, pouring in $77,500 in personal loans to her own campaign. Around the same time, she stopped making payments on the Sacramento house. The bank issued a default notice in December, and the home was sold at a public auction on May 7 for $388,000.”

“The real loser in the deal was Washington Mutual Bank, which issued Richardson a $535,000 loan with no money down in January 2007. By the time the default notice was issued, Richardson was underwater on the loan. She owed about $575,000, including $18,000 in missed payments.”

“Washington Mutual ended up writing off nearly $200,000 of that debt to get rid of the home.”

“Although Richardson did not pay her property taxes or the balance of her loan, she has begun repaying the loans that she issued to her own political campaign. Richardson, a former Long Beach city councilwoman, still owns a home in Long Beach.”

“One of Richardson’s first votes upon arriving in Congress last fall was on the Mortgage Forgiveness Debt Relief Act of 2007. The bill helped homeowners by preventing the federal government from charging income tax on debt forgiven in a foreclosure, such as the $200,000 forgiven in Richardson’s foreclosure.”

“Joining 385 of her colleagues, Richardson voted aye.”